Debt Management 101: Prioritizing Your Debts

Learn sound advice for how to tackle your debt the right way

By Amy Brantley

A primary rule of debt management is to prioritize your debt. If you go through life making only minimum credit card payments, you'll never make any progress toward eliminating debt. You need to have a plan that makes the most of your money and pays down your debt.

Pay off small accounts If you have a balance of $500 or less on one of your accounts, pay that amount off as soon as possible. Even if the interest rate is small, getting these little accounts out of the way will make debt management easier and will allow you to put even more money toward high-interest accounts. According to financial expert Dave Ramsey, this is known as the debt snowball. Before you know it, your debt will quickly be paid off and you'll be debt free once again.

Pay down high-interest accountsIf you have accounts that are around the same amount, pay off the high-interest accounts first. You should also aim to pay more than the minimum monthly payment. Doing so ensures that you're actually making a dent in your debt. Otherwise, you'll only be paying the interest each month. On the other hand, those lower interest accounts will begin to shrink even when paying minimum payments.

Save non-consumer debts for last Mortgages, student loans and other non-consumer debt should be paid off last. With these accounts, you typically have a slip of paper for each payment that needs to be made before the debt is gone, letting you know precisely how much you need to pay each month and how many payments you have left at any given time. Once all of your other debts are paid off, you can choose to pay more than one payment at a time on your non-consumer debts. Remember to include the appropriate number of payment slips when you make more than one payment. This will extend your payment by that many months rather than simply having one larger payment. Should anything happen, you'll be paid ahead and won't have to worry about missing payments.

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